Output and international transactions

Output: two different tests

Gross domestic product, or GDP, measures the value of final goods and services produced within the United States. A foreign-owned Ohio factory still produces within the US. Currency quotation and the owner’s citizenship are not the location test.

Gross national product, or GNP, measures production by labor and property supplied by US residents wherever located. Do not substitute citizenship or company ownership for that test. A US company’s foreign operation does not make every part of its output US GNP.

The measures can overlap. Final production in the US using US-resident labor and property contributes to both. Production abroad using US-resident labor and property supports US GNP while that foreign production lies outside US GDP. These tasks ask you to recognize the tests, not reconcile national accounts.

Transactions: wider than goods trade

The balance of payments records transactions during a period between US residents and residents of other countries. It includes goods, services, income, investment and transfers. A loan-interest payment or share purchase can be international even if no physical goods move.

The goods-and-services trade balance is exports less imports for those categories. A goods deficit can coexist with a services surplus; the combined result depends on their sizes. A goods-only report does not describe all international transactions.

A transaction during a period is different from a stock of assets measured at a point in time. Do not read a private investment transaction as the central bank’s reserve stock or the federal government’s budget.

Exam terms

GDP

Final domestic production.

GNP

Production by resident-supplied labor and property, wherever located.

Trade balance

Exports less imports; goods and services can be reported separately and together.

Balance of payments

International resident transactions over a period, wider than trade alone.

Worked example

An analyst sees a goods deficit of 40 units and a services surplus of 25 units for one period. The same period includes interest received from foreign residents.

1. Combining goods and services gives a trade deficit of 15 units, because the goods deficit is larger than the services surplus.
2. Interest is income, not goods or services exports. It belongs in the wider international transactions record.
3. The figures do not provide every category needed to describe the full external accounts. Do not label the trade balance as the whole balance of payments.

Check yourself

Try a question, then read the explanation to review the rule.

Same rule, new context

Same rule, new context

Related practice

• Domestic versus national outputPractice this
• Balance of paymentsPractice this